Over the course of every month, about two dozen supertankers carrying more than a million barrels of oil apiece lumber past Cape Town, South Africa, on their way from west Africa to oil terminals on China’s coast. The 12,000-mile journey takes nearly a month, but it is worth the wait: China meets nearly a fifth of its crude oil demand through imports from west Africa, including much of that from Angola.
To accommodate China’s prodigious appetite, traders inside west Africa’s opaque crude oil market have learned to anticipate lots of bids by Chinese refiners, early and fast. Often Chinese refiners will have bought up their entire month’s supply two months before the oil is even pumped out of the ground and loaded onto ships.
The pace is decidedly slower this trade cycle.
As the coronavirus, or COVID-19, stunts Asia’s largest economy, oil traders eager to get west African crude cargoes off their books say that Chinese demand for the next round of shipments — due to be loaded onto tankers in April — has cratered. In Angola, oil companies like France’s Total or ExxonMobil typically ship the vast majority of the country’s roughly 1.3 million barrels a day of output to China. But as demand stutters, some sellers are being forced to offload their one-million-barrel-apiece cargoes well below the usual prices to other buyers. Indian refining company Bharat Petroleum has reportedly scooped up unwanted cargoes on the cheap. Angola’s state oil company, Sonangol, advertised some of its crude oil cargoes at the lowest prices in around a year yesterday but still didn’t nab any Chinese buyers — although it did earlier sell a cargo to Taiwan’s state-owned oil company.
The demand slowdown could worsen. Earlier this week reports emerged that banks have frozen credit lines to several independent refineries in China’s Shandong province, known inside the industry as “teapots.” At least some large Chinese refineries have already slashed their intake of crude oil amid weak domestic demand for gasoline and other products, but any further curbs on refinery intake could translate into even lower demand for west Africa’s crude oil.
So far, that hasn’t happened. According to one west African crude trader who preferred not to be identified, independent Chinese refiners’ appetite for west African supply may be recovering after retreating initially. Still, there aren’t yet any signs that buying from the larger state-owned companies that account for most of China’s purchases — Sinochem and Unipec — has recovered. Moreover, China’s purchases may have more room to fall, since not all Chinese refineries have yet filled up all of their storage tanks.
The International Energy Agency (IEA) said earlier this month that it expects global crude oil demand to contract in the first quarter of this year for the first time in more than 10 years, mainly because of China. Yesterday, the IEA’s executive director, Fatih Birol, told reporters at a conference in London that expected oil demand may need to be “revised…downward.”
West Africa is hardly China’s only source of crude oil imports, nor is it the only region to suffer as China’s demand falters. Russia supplies around 20% of China’s overall crude imports, similar to the combined share of imports from west Africa. Prices of a Russian crude oil grade called Espo Blend have reportedly fallen to their lowest prices since mid-2017 — around $1.70/1.80 per barrel above the price of exchange-traded oil, which has suffered a price plunge of its own and is currently trading around $53 per barrel.
But west Africa is arguably among the regions from which China might want to cut supplies first in the event of a demand shock. Most of its other large suppliers are far closer, including several, led by Saudi Arabia, that are clustered in the Middle East. Halting purchases from distant west Africa could mean saving money on shipping costs.